Corresponding Author Affiliation*: Air University, Pakistan

Abstract:

The main objective our study is to explore the relationship between working capital policies and firm’s performance. Using OLS method to analysis the data after fulfilling the assumption of the regression, this study finds the working capital components (APP, ICP, CCC) and the firms’ performance are negatively correlated with the ROA and Tobin-q except ACP which shows significant relationship with Tobin Q. All working capital components show the significant relationship with ROE, which indicates that most firms used shareholder’s equity to increase firm’s value. The relationship between the APP and the firms’ performance has shown mixed results. This study shows that the ACP and the firms’ performance are positively related. However, the companies are showing the positive relationship between the ACP and the firms’ performance as measured by the ROE and Tobin’s Q. This indicates that the shorter ACP in a firm is more preferable to the shareholders. All companies show a positive relationship between the CFP and the firms’ performance. The relationship indicates that the conservative financing policy is a policy which carries a higher amount of current liabilities will contribute to negative firms’ profitability and value. The negative relationship between the CLTAR and the firms’ performance indicates that the higher current liabilities in a firm will be a factor towards lower firms’ performance. The aggressive financing policy is only significant in all the independent variables. The ROA found CFP and CIP as significant, while in ROE CFP is significant. AIP, CIP and CFP are significant in Tobin Q.

Keywords: CATAR, CLTAR, ROI, ROE. Cash Conversion Cycle